Yellen still hiking this year, and next
The Fed’s message last night was hawkish. Expectations were met as the US central bank announced the balance sheet normalisation process will begin in October (reversing the quantitative easing investments). The Fed will be winding down by $10 billion per month in a mix of both Treasuries and Mortgage-Backed Securities (MBS). This gave the central bank confidence to state that there could be one more rate hike by the end of this year as 12 of 16 FOMC members voted in favour of the possibility.
There could also be another three rate hikes of 25bps each next year according to the latest “Dot plot” projection. That said, inflation expectations were cut back for 2017 and 2018 as rates were revised down to 2.8% from 3.0%, with one less rate hike projected for next year.
Janet Yellen also mentioned how the labour market remains healthy and payroll gains are well above the rate needed to absorb the normalisation process. Inflation continues to run below the 2% goal but does not reflect the broad economic conditions, complementing the firm Dollar sentiment.
The Dollar initially spiked lower before gaining against its peers as the markets re-priced the possibility of another rate hike this year. Cable fell below the 1.3500 mark whilst, against the Euro, the spot market ended the session trading just below 1.1900.
UK retail sales rose for the 52nd month in a row, exceeding market estimates by rising 1% in August, and 2.4% year on year. The figures show higher prices had failed to stop consumer spending, despite the squeeze on wages, which have not been rising as fast as inflation.
The Greenback continues to keep an edge over Sterling, as the yield differential between the US and UK continue to favour the Buck. Recall that the Bank of England (BoE) Governor Carney toned down his hawkish bias earlier this week, reiterating that any rate hikes are expected to be ‘gradual’ and ‘limited’.
However, the ongoing corrective move lower in Cable continues to find support near the midpoint of 1.3400, as yesterday’s unexpected jump in the UK retail sales data combined with expectations of a BoE rate hike sooner (rather than later) continue to underpin the sentiment behind Sterling.
Focus now shifts towards the UK public sector net borrowing data and US economic release for fresh momentum on the prices.
With the headline-grabbing Fed meeting dealt with, focus will now turn to the European Central Bank (ECB) as a long list of speeches are due in the coming days from its members. The markets will be looking for indications on what to expect at the important October 26th meeting, when the ECB has stated it will provide a clearer picture on the ECB’s exit strategy.
Today, the calendar contains European Economic and Monetary Union (EMU) consumer confidence data and speeches by the ECB’s Praet and Smets. Consumer confidence is expected to remain stable, sitting just below its usual cyclical highs, whilst the debate on the ECB’s Asset Purchase Programmes (APP) programme is scheduled to be in full swing. Smets and Praet, close to Mario Draghi, are key players inside the ECB and, therefore, any comments from them on the fate of APP won’t go unnoticed.
Data To Watch:
9:00am EUR Economic Bulletin
9:30am GBP Public Sector Net Borrowing (Aug)
10:30am EUR ECB’s Praet Speech
1:30pm USD Continuing Jobless Claims (Sep 8), Initial Jobless Claims (Sep 15) Philadelphia Fed Manufacturing Survey (Sep)
2:00pm USD Housing Price Index (MoM) (Jul)
2:30pm EUR ECB President Draghi’s Speech